Be a “Dumb” Investor

Be a “Dumb” Investor

Everyone we meet wants to be a “Smart investor.”

Who are these “Smart Investors?”

They are generally well read and well informed, professional, erudite and on top of their vocation or profession. They believe in studying the markets, investing when the timing is right and exiting when the market hits the peak. They prefer investing in direct equity, and believe that consulting a financial advisor, or investing in mutual funds through a distributor, investing in Debt  and other asset classes are for the less fortunate and “Dumb Investors.”

“Smart Investor” reads the pink papers, watches the business channels and follows the market makers on social media and make intelligent conversation in their circuit and are ready to reap the “benefits” of their superior knowledge.

“Smart Investors” generally want to perfectly time the market, Sell at the peak and buy at the absolute Nadir. If they find that prices have fallen considerably after they have bought a stock, they must buy more of the same stock and average their price without any consideration of the fundamentals of the stock. For many “smart investors”, their only consideration for buying a stock is the discount at which it is trading from its 52 week high or from its 200 DMA.

“Smart Investors” believe in exotic products as they believe that if the product offering is complicated and difficult, only they will be able to understand it and smartly make money from it as  against conventional market wisdom that exotic/difficult products only benefit the seller and no one else.

They also believe in Investing in themes as they have been given the wisdom and have a God Given gift of identifying the theme before it actually happens and can make money from it.

Iam reminded of the U.S. market, before the turn of the Millennium, when the “Smart investors” bet heavily on the internet and related theme that was going to “change everything.”

A famous E-TRADE ad in the U.S. in late 1990’s urged investors to “Boot Your Broker” and trade online. It Urged people with extra money to invest it in stocks on the Internet through the E*TRADE service. Using a football game as an analogy, it also explained the basics of smart investing and how to make money.

Thousands followed that advice, sometimes quitting their real jobs to day trade hot stocks like Yahoo and Internet incubator CMGI (which gained almost 5000% in five years) many times a day. Nobody expected the merry-go-round to stop, but of course it did, and even non-day-trading investors, who had bet heavily on technology and the Internet, lost their shirts. The S&P 500 tumbled 49% and the Nasdaq Composite Index lost an astonishing 72% of its value.

“Smart Investors” had bet on the hottest theme of the century, despite making initial gains, the result was exactly the same: Very few ended up making money. Some people who had lived through this grim experience swore off investing forever.

The same result has been repeated several times hence, in 2008, 2013 and many other times but the “Smart Investor” never learns, relying more on his knowledge, deep understanding and intuition rather than market history. A common quote of the “Smart” Investor whenever the market hits a new peak and he is buying is, “This time it is different.”

What are the chances that you will be able to predict market movement ?

We feel, you should not even try it.

Your best option would be to invest in a disciplined manner and on a regular basis. Tools like SIP are your best options in all types of market scenarios. And if, you still want to track market and invest at a lower point then make use of any dip that are available and the market offers from time to time.

How likely is it that you will be able to enter the market just at the bottom?

We would say the chances are negligible. Several “ Smart” investors have recently burnt their hands and made a deep hole in their pocket following the timing and averaging strategy in the case of Yes Bank, ADAG stocks, DHFL, Jet Airways, Hotel Leela, Educomp and many more. 

If you are a long-term investor, as you should be, remember over a long-term period every correction is going to look like a wrinkle. If you are investing for a goal, which is 10 years away, whether it is for your child’s higher education or your retirement, and aiming for the Sensex at 100000 in 7 years, does it really matter whether you invest at 36000 or 45000 Sensex?

So, rather than trying to predict and time the market movement, participate at every turn, make use of every opportunity. Don’t wait for a correction to invest because, “more money is lost in waiting for the correction than in the correction itself.”

What is important is that you should meet and consult your financial advisor, decide your financial goals, quantify them in terms of amount and the time when you require the money. Finalise your Asset allocation strategy based on your risk profile and fund requirement and start your investment journey in time.

Please don’t even look at equity markets if your investment horizon is less than five to seven years. It will be too risky and the volatility will give you an unpleasant journey.

But the problem with most investors, is just say Equity market and somehow greed creeps in. You want to invest in a multibagger if not a ten bagger. All the stories you have heard in the cocktail circuit on how wealth was multiplied by just investing in some penny stocks, and you want to try your hand and risk your hard earned money to multiply it.

Mom and Pop retail investors and the so called knowledgeable professionals, who are out to be the “Smart Investors” are known on Wall Street as “dumb money”, and are always the last ones to the party and suffer from the worst of returns. 

The very nature of the equity market is to remain volatile. Even though the long-term trajectory of the market is upwards, the journey is not linear, but with its share of ups and downs.

In recent times, the broader market has corrected sharply and is trading at near its mean level but no investor is interested in investing, rather they are waiting for further corrections. Let the market start its upward journey and start crossing milestones once again and our phones will not stop ringing with investors wanting to rush their investment and not miss the party.

Strange investment behaviour, just to share an analogy, Shoppers heading to their local mall to buy clothes would generally buy double if there is a SALE and fewer clothes if they found that prices had doubled. Investors are the opposite of shoppers. They tend to get excited by higher prices for financial assets. If prices of stocks double, it is likely that investors will want them more. And the more they go up, the more investors tend to want them in a phenomenon known as “fear of missing out,” or “FOMO” for short.

“Dumb” investors don’t make investing in the stock market their daily passion. They are more likely to show tons of patience and have a long term approach to investing. In general, they would not be concerned about market highs and lows. They would look to invest continually, regardless of stock price or market levels.

In essence, dumb investors are those who aren’t tracking the daily minutia of the stock market and consequently are not making the “best” choices with their money.

We always emphasize with investors to work with a plan, work to achieve your financial goals, ignore all noise, concentrate on your asset allocation, convert your investment to a formula driven strategy, but all this sounds rather tame and dull. It is annoying and boring in the most exciting of times. Our strategy appears as a “Dumb” thing to do with no action happening at most times.

But every study shows that “Dumb Investors” who follow a formula driven approach to their investing beat the “Smart Investors” over longer periods of time, provided they don’t act “smart” and can stay off the temptation to make a quick buck and time the market.

Markets have repeatedly proven that The “Dumb Investors” are actually the smart investors. So, be a Dumb Investor and enjoy your investment journey.

The purpose of investment is not to brag about your returns and multi baggers over rounds of your favourite Single Malt or on the Golf Course but to follow a strategy to achieve your financial goals. And if that can happen by being “Dumb”, so be it.

Happy Investing!

Stay Blessed Forever

Sandeep Sahni

Kindly check our earlier blog on a similar subject : Investment Lessons from Mythology at https://sahayakgurukul.blogspot.com/2019/03/investment-lessons-from-mythology.html OR https://www.sahayakassociates.in/resources/our-blog/2553-sahayak-associates/sahayak-associates-blog/8435-investment-lessons-from-mythology 

Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks. 

About The author

Sandeep Sahni

Sandeep Sahni

After completing his schooling from St. Johns, Chandigarh (Class of 1980) and Modern School, New Delhi, (Class of 1982) Sandeep did his B. Com (Hons.) from Shri Ram College of Commerce, Delhi University (Class of 1985)

Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988).

He has also written two books, ‘Dear Son, Life Lessons from a Father’ on the teachings of Life https://www.amazon.in/dp/1637815271 and the Second book which he has Co Authored titled, ‘What My MBA Didn’t teach me about Money’ on the Human and Financial perspective of money. https://www.amazon.in/dp/1637816502

He has a rich work experience and started his career as a corporate man with Asian Paints after IIML. He has a rich experience covering the FMCG, Food Distribution, Cold Chain, Logistics, and Hospitality Industries. He is currently in the Wealth Management and Personal Finance domain. He has a passion for finance and is an active speaker on topics in finance. The stories he narrates strike a chord close to his heart, as they are based on events from his own life. He believes in a holistic view of Personal Finance.

Sandeep’s investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and is advising more than 500 clients across the globe on Financial Planning and Wealth Management.

He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.

Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.

Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.

His passion has driven him towards career counselling for young adults and mentoring the youngsters on achieving their life goals and becoming “Successful Humans”

He also writes a well-read blog; https://sahayakgurukul.blogspot.com

He has also conducted presentations, workshops and guest lectures at professional colleges and management institutes for students on Financial Planning and Wealth Creation.

He can be reached at:

+91-9888220088, 9814112988,
sandeepsahni@sahayakassociates.in

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